January 28, 2008

The Markets Give No Quarter

A WHILE BACK I had written a few posts extolling my own cleverness at having bought shares in E*Trade Financial Corp., the on-line brokerage.

On Nov. 14, for instance, I cheerfully recounted how smart I was to buy in at roughly $4.21 per share, and how this had made me 25 pc on paper in just one trading session. On Nov. 30, I wrote about E*Trade's deal with Citadel, and how the trading on that particular day proved that many -- although not all -- day traders are dumb. Then, on Dec. 4, I wrote about how some idiot analyst at Bank of America downgraded the stock, a move which turned my paper profits into paper losses. The analyst, whom we know is an idiot because he spoke out against one of my positions, claimed the stock would drop to $2.

Of course, the stock DID drop to just over $2 roughly five weeks later. At this point, I have to admit I was kind of hoping Loyal Rant Readers would conveniently forget that I had been so gleeful earlier. But I still had confidence in the thing, and it would appear that my confidence has paid off. At least for the moment. For ETFC closed out the day today at $3.90 per share, which means I'm about where I was on Dec. 4 -- down $20. Behold my intestinal fortitude. Behold my triumph. I rule!

There's even better news too: the latest short-selling data came out, and it shows that between Dec. 31 and Jan. 15, the short interest in ETFC -- i.e., the people betting ETFC will fall in value -- rose 12.2 pc over that time frame. That's something on the order of 9 million shares. Now, at the end of the day on Dec. 31, ETFC was trading at $3.55 per share; at the end of the day on Jan. 15, ETFC was trading at $2.92 per share. Now that it is at $3.90 per share, one can deduce the short-sellers behind that increase have in the aggregate lost money. Not all, of course -- one can imagine a lot of smart folks got out when the stock hit $2 or around there. But it seems pretty clear there are plenty of folks who have entered a world of pain as a result.

This is good for buy-and-hold types like me, who are "long" on E*Trade. This is because short-sellers make money through borrowing shares and selling them. For instance, if Trader A shorts 5000 shares of Stock X at $10, and Stock X falls to $7, he has made $15,000. But to close out his position, he must actually buy the shares that he borrowed and sold and give them back to the original owner -- thus pushing the price of the shares upwards.

I have no idea, of course, whether the recent rise in ETFC's shares is primarily due to short-sellers covering their positions. But that sure would be great. You see, like most "long" investors, I view short-sellers -- at least those with the audacity to short my holdings -- with scorn and contempt. If they had decided to short something else, well, business is business. But if they short my stuff, their actions inherently depress the value of my investments. As such, there's part of me that quietly hopes they get cholera, because they are clearly all secret Communists and obviously hate truth, justice and the American Way.

What's that? OK, so that might be a little much. Thus, I guess I'd settle for "them losing money" and "me making it." Also, should any of them find themselves hanging from the brink due to a margin call, I want to stomp on their fingers and laugh maniacally. Hey, the markets give no quarter, and neither do I.

DISCLAIMER: This is in no way intended as financial advice. Even a cursory glance at ETFC's charges will show investing in ETFC is an incredibly risky proposition. Thus, you should only invest in anything after reading an actual prospectus and talking it over with an actual financial advisor, you know, someone who knows what he's doing and stuff. Investments can lose value, just like collectibles from the Franklin Mint can lose value. Caveat emptor. Caveat vendor. Oh, and remember Daniel Drew's old saying:

"He who sells what isn't his'n
must buy it back or go to pris'n."

Posted by Benjamin Kepple at January 28, 2008 07:48 PM | TrackBack
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